JoAnn Asselin's Blog
Buying a home will likely be one of the largest financial decisions you will make in your lifetime. While this may seem scary at first, it’s worth noting that buying a home can also be a valuable financial investment.
When it comes to preparing to buy a home, many people just wait until they run out of room in their apartment before deciding that they need to upgrade to a home. A better approach, however, would be to start planning for your first home a year or more in advance.
Saving for a down payment is a vital step to making the best long-term financial decision. A larger down payment can help you pay off your home sooner, pay thousands or tens of thousands less in interest, and start using your home equity as an asset.
But, saving for a down payment is easier said than done. So, in this post, we’re going to talk about some of the ways you can aggressively save for a down payment so that, when the time comes, you can achieve long-term financial security from your investment.
Setting your savings goals
The first thing you should be thinking about when saving for a down payment is what your goals are in a home. Setting realistic goals in this phase will make saving for your down payment more feasible and less discouraging.
Think about what you really need from a home at this point in your life and compromise where you can.
Remember that on top of your monthly mortgage payments, you’ll likely also be paying for taxes, insurance, utilities, homeowners association fees, and more.
Save on a timeline
When setting your savings goal, make sure you’re aware of the timeframe you’re working with. If you want to buy a home next year, you’ll need to focus on short-term savings options. However, if you’re okay with renting for the next 5 years, investing your money could be a better option.
Lock away your savings
Treat your down payment savings like an emergency fund. Open a separate account, automatically deposit a portion of your pay into the account, and never withdraw from it. To do this, you will, of course, need to already have an emergency fund with a month’s expenses in it.
However, once you’ve established your emergency fund, start immediately depositing into your savings account.
Pay off credit cards
It may seem like saving for a down payment is more pressing than paying off old debt. However, the numbers will show that making interest payments on your credit cards is essentially throwing away money that could have been used toward your down payment savings.
Adjust your spending habits
While it isn’t easy to start spending less once you’ve built a standard of living, there are ways to spend less money and still lead a fulfilling life. Think about where your money goes each month, including bills and services you might pay for.
Now could be the best time to cut the cord and start using a service like Hulu to save $50 or more each month.
Time for a raise?
If it’s been some time since your last pay raise, now could be an ideal time to speak with your employer. To improve your chances of success, don’t discuss reasons outside of work that might be influencing your decision to ask for a raise (such as saving for a down payment). Rather, back up your request with evidence of your accomplishments at work.
Applying for a mortgage may seem like a long, stressful process at first. Fortunately, we're here to help you take the guesswork out of submitting a mortgage application.
Now, let's take a look at three tips to help you streamline the mortgage application process.
1. Ask Questions
A bank or credit union likely will ask you to provide a wide range of information as part of the mortgage application cycle. And as you complete a mortgage application, you may have questions along the way too.
Remember, a lender is happy to help you in any way possible. If you ever have concerns or questions as you complete a mortgage application, you should reach out to a lender for expert support. That way, you can reduce the risk of potential problems down the line that otherwise could slow down the mortgage application process.
Even a single mistake on a mortgage application may prevent you from getting a mortgage. Perhaps even worse, a delayed mortgage application may force you to miss out on an opportunity to acquire your dream house. But if you reach out to a lender as you complete your mortgage application, you can gain the insights you need to quickly and effortlessly finalize the necessary documentation to obtain a mortgage.
2. Be Thorough
A mortgage application may require you to look back at your financial and employment histories and provide information that a lender will use to determine whether to approve or deny your submission. Meanwhile, you should be ready to provide a lender with any requested information to ensure a seamless application process.
As a homebuyer, it is your responsibility to include accurate information on your mortgage application. In fact, failure to do so may cause a lender to reject your mortgage application. If you allocate the necessary time and resources to dot every I and cross every T on your mortgage application, you can boost the likelihood of a fast approval.
3. Shop Around
For homebuyers, it is crucial to check out all of the mortgage options that are available. If you meet with a variety of banks and credit unions, you can review myriad mortgage options and select a mortgage that complements your finances.
Banks and credit unions generally provide a broad array of fixed- and adjustable-rate mortgages. If you learn about all of the mortgage options at your disposal, you can find one that enables you to purchase your dream house without breaking your budget.
Of course, once you are approved for a mortgage and are ready to launch your house search, you may want to hire a real estate agent as well. A real estate agent will offer plenty of guidance at each stage of the homebuying journey. In addition, a real estate agent can make it easy for you to find a top-notch residence at a budget-friendly price in any housing market, at any time.
Start the mortgage application process today, and you can move one step closer to acquiring your dream residence.
You may have heard of private mortgage insurance, also known as PMI, but you’re probably not sure what exactly it is. If your down payment is less than 20% of the purchase price of the home, then you’ll need to pay for this additional insurance in order to secure a loan for the home. This type of policy protects the lender if you end up in a foreclosure situation. This way, the lender is assured that they will not lose money.
Private mortgage insurance is also required if you refinance your home when it has accrued to less than 20% equity. Again, this protects the lender from losing money if the loan is defaulted on.
The fees involved with private mortgage insurance can range based on a few factors including the actual size of the down payment and your credit score. You can expect the cost of the insurance to be somewhere between 0.3% and 1.5% of the loan amount per year. The PMI premiums are tax deductible some years and other years they are not. It really all depends upon the state of the government and what they have enacted for the particular fiscal year. Private mortgage insurance premiums can be paid either monthly or with a large payment upfront, although most policies will require the borrower to pay on a monthly basis.
This Insurance Can Be Canceled
The lender will automatically cancel your PMI once the loan drops down to 78% of the home’s value. For this reason, you’ll want to keep track of your payments in order to see how far away you are from shedding this monthly fee. When your loan is paid down to 80% of the home’s original value, you have the right to ask your lender to discontinue to insurance premium payments.
What Is The Loan-To-Value Ratio?
This ratio is the amount of mortgage debt in the form a percentage based on how much the home is worth. It’s calculated by the following formula:
Amount owed on the mortgage/Appraised value
This is an important factor when it comes to matters of PMI insurance, as it’s how the required loan payment percentages are calculated. If a home is worth $100,000 and $80,000 is still owed on the home, the loan-to-value ratio is 80 percent. This means the borrower can request the insurance be cancelled.
FHA Loans Have Different Requirements
If you secure an FHA loan, they require the payment of PMI premiums for the entire life of the loan. You can’t exactly cancel these insurance payments but you can refinance the loan in order get rid of the insurance. This means that you will no longer have an FHA loan.
Private mortgage insurance can be a nuisance, however as a first-time homebuyer with little capital, the fees may be worth it when you’re able to secure your first home.
When you get pre-approved for a mortgage, you may be excited to find out that you can afford a lot more house than you thought you could. Don’t be so fast, this is just what you can get a loan for. The bank doesn’t know a lot of factors about your finances. While you most likely had to provide a ton of income verification statements and information in order to get this ballpark figure, relying solely on the pre-approval number can put you in a bind when it comes to your finances. Your lender doesn’t know certain things like how much you spend on groceries or how much your cell phone bill is each month.
What Lenders Consider
Lenders look at the health of your credit history, how much income you have and how much debt you have. These are the big factors that tell your lender about how much house you can afford. Yet, your home lender is not your financial advisor and can’t help you with household expenses and the like. When thinking about what price range of home you really can afford, consider these factors beyond the bank:
Your Monthly Budget
Your spending habits will ultimately affect your ability to pay the monthly mortgage bill. If you’re spending all of your disposable income, then you may not be able to afford much at all beyond what you’re already paying for rent. You don’t want to stretch your finances so thin that you won’t be able to afford food!
Owning A Home Requires Additional Costs
Lenders do factor into their number the cost of homeowner’s insurance and property taxes, but don’t consider other things like utility bills, trash pickup and home repairs. All this can certainly add up when you’re a homeowner!
Your Savings Is Nonexistent
If you’re unable to save any money at all if you’re a homeowner, then you’ll be in trouble. You need money stashed away in case of unemployment or an emergency. You also may be planning for things like retirement and future costs like children’s education. For the initial purchase of a home, you’ll need upfront payments available for the down payment and closing costs. However, you’ll need some more savings beyond that for everything that life brings your way!
You Have Big Plans
Are you thinking of quitting your job and heading out to start your own business? Now may not be the best time to buy a new house. These changes could have a huge impact on your finances and leave you unable to pay your mortgage. Your lender won’t be asking about these plans, so you’ll need to know what the future holds (for the most part ) in order to keep your own finances secure.
The bottom line is that anything that could leave you financially stressed is not a good idea. Considering that buying a home is one of the biggest purchases you'll ever make, you want to be sure that you keep your finances in check during the purchase process.